The economics and politics of instability, empire, and energy, with a focus on Latin America and the Caribbean, plus other random blather and my wonderful wonderful wife. And I’d like a cigar right now.

Economics

July 29, 2015

Removing all immigration restrictions is a pretty fringe idea. There are reasons for that, as a careful reading of this defense at Vox will show. Dylan Matthews is trying to justify an ideological belief by claiming that indulging it will have no costs on anyone, and what costs it does have can be compensated, and anyway those costs don’t matter because the gains to non-Americans are so much greater.

He makes those second two points because his claim that there are no costs is complete bullshit.

Some Vox columnists have a skill at making me recoil from positions I hold. That is some sort of talent.

July 24, 2015

I have not had too much luck over the past few years with big new research projects aimed at Mexico. In part, that has been because I ratcheted back slightly over the past two years, after finishing The Empire Trap, for psychological reasons. Also in part, it has been because I have been taking on a bit more paid work than I used to. Thus, the posts on Albanian electricity, Colombian coal, Ecuadorean foreign relations and Puerto Rican finance that you have not seen. I assure you, they were brilliant. But mostly it has been because I either been unable to find the data I needed or failed to get it released. Or in one case, have not been able to figure out how to operationalize the hypothesis.

So here is my next research fail, previewed for you before I even begin! There is a long-standing argument in political science that the best way to combat corruption is raise civil service salaries. Two papers make the case more generally. In Brazil, Claudio Ferraz (PUC-Rio) and Frederico Finan (Berkeley) found that higher wages for legislators attracts better-educated people into politics and increases political competition. A follow-up paper by Finan along with Ernesto Dal Bó (Berkeley) and Martín Rossi (San Andrés) found that higher wages in Mexico attracted better candidates, although the effect on outcomes was not really measured.

More interestingly, and to my surprise, so do police salaries! And not by a little bit. A lot. In 2011, Querétaro paid cops 18,173 pesos per month ... That was around US$19,000 per year (at 13 months pay). Not riches by American standards ... but rather higher than the US$7,930 per year average. On the other hand, the state police in Tamaulipas earned just 3,618 pesos per month, a miserly US$3,784.

But just to mess you up, Nuevo Laredo, a county in Tamaulipas, had the highest salary for its municipal police in 2010: roughly US$14,100 per year.

The problem, of course, is that the federal government only conducted the survey once, to check and see if local police forces were complying with new laws aimed at professionalizing the police. So there is no time series. That I know of.

June 23, 2015

A commonsense definition of “austerity” is “cuts in government spending.” Now, that isn’t quite the correct macroeconomic definition: a cut in spending combined with a bigger cut in taxes is not contractionary. But it matches a good political definition: are countries imposing pain on their populations?

And so, I give you the level of nominal government spending in Greece and the Baltic States, plus Slovakia, because the Slovaks have been incredibly annoying. The figures have been normalized so that 2008 = 100.

Whaddaya know? Greeks have endured austerity beyond anything imagined in the Baltics. Yes, the Baltics are poorer than Greece. But that is not how people feel pain: we are far more averse to losses than to unrealized gains. The pain among, say, Greek pensioners or government employees has been beyond anything the Baltics have seen since the Soviet Union fell apart.

Now let’s look at the other side of the ledger: taxes. How much pain have the Greeks imposed upon themselves in order to pay for their state? As a % of GDP:

My. Puts things in perspective. I really do wish the Balts would just pipe down already. Their countries would be in chaos were things as bad as they are in Greece.

June 19, 2015

Some smug folks recently insisted to me that if the Baltic states could muscle through the current crisis, than so can Greece. Why are the Greeks so upset about more austerity?

Uh ... well, here is the real GDP of Greece and the Baltic countries, indexed to 2007:

There really is no comparison.

This applies even if we look outside the universe of countries that either are in the Eurozone or peg their currencies to the euro. According to Gabriel Sterne at Oxford Economics:

The decline in Greek GDP has precedents, but only in wars, commodity collapses, and Argentina. Even without exit, it is likely to have been in the bottom 4% of crisis recoveries seven years on if IMF projections for 2015 prove correct. Greece’s $-GDP will likely have declined at least 42% between 2008 and 2015. Below Greece are five extreme cases:

Ghana (1982), whose $-GDP never recovered for years after plummeting 80% in two post-crisis years, partly related to a commodities slump;

War-torn DR Congo, whose $-GDP fell 48% in the seven years after 1991;

War-torn Ukraine, whose $-GDP has fallen by over 50% since the 2008 financial crisis;

Guinea Bissau’s 1995 crisis was not so bad, but the civil war that followed meant $-GDP had fallen by over 50% five years later;

Argentina (for crises in 1980 and 1995, not 2001)

Sterne goes on to argue that this implies that the situation really cannot get much worse in Greece should it be forced into Grexit.

Personally, I still do not understand why an agreement is proving so hard. Greece should not cut pensions or agree to a big primary surplus. The Europeans should agree to roll over debts that will otherwise inevitably go into default. Everyone should then use the breathing room to think about how to reform Greek tax collection and cut Greek debts. Voila.

But no. I really do not understand it. The only logic I can imagine is that they want to scare the bejeebus out of Spanish voters or anyone thinking of voting for a radical new party. What am I missing?

February 27, 2015

This blog has long taken the position that Hugo Chávez was uniquely incompetent. There was a time, back in 2008, where we gave him political props for building an effective machine. That admiration began to fade with the electricity crisis. Then some of this blog’s old readers (where have you gone?) made good arguments that the Chávez boom wasn’t all that it was cracked up to be, although we remained on the positive side of neutral. Sure, there were some shortages caused by price controls. But other than the insanity in the electricity sector, the controls could be justified as a means of income redistribution in a country that lacked the administrative ability to impose punishing income taxes. (This gets to a question from Randy that I will try to get back to.)

Unfortunately, the Socialists proceeded to run completely off the rails. Their cardinal sin was keeping the bolívar pegged at 6.3 to the dollar. The resulting capital controls have led to massive shortages of imported goods. Had the exchange rate regime been liberalized after the 2013 elections, living standards would have been hit, but the economy would be in better shape now. As importantly, the Maduro administration would have the space to engineer a mini-boom before the midterm elections. As it stands, however, Venezuelan exchange rate policy stands as an incredible example of economic and political incompetence.

After all, in a another world the people lined up to buy cheap goods at a state-owned supermarket would be grateful to the government which got it for them. But in this world they are quite angry at the government. Here is a good article by David Smilde of Tulane University that argues that it is too late to effectively reform. The Socialists are going to (a) lose the next election; (b) pull some sort of hat-trick involving Chinese money and a short-election season; or (c) actually turn Venezuela into a dictatorship. (The link goes to an earlier post here that argues that the Polity IV score ranking Venezuela as already dictatorial is bullshit. But we were would agree that it is not far-fetched to imagine Maduro abandoning democracy, possibly via unconstitutionally postponing the midterm elections. That Polity IV ranker may have been prescient.)

Or maybe Trinidad will come to the rescue? On Wednesday, the Trini prime minister, Kamla Persad-Bissessar, offered to swap tissue paper for bitumen. “The government of Trinidad and Tobago will purchase goods identified by the government of Venezuela from T&T’s manufacturers, such as tissue paper, gasoline, and parts for machinery.” It is part of the Trinidadian charm offensive that just enabled a deal for joint exploration for natural gas in the Gulf of Paria.

But as strange as it is to see T&T riding to the of the Bolivarian Republic, I would argue that it is probably too late for (b). The government certainly has started to throw a lot of opposition leaders in jail. That is more (c) than (b), even if they manage to pull off a win without election fraud. (Stealing elections, we have to add, is hard to do in Venezuela. Some things Chávez did right.)

So what does all this have to do with Panama? Well, mainly a demonstration that I am not an orthodox right-wing buzzword-of-the-day.

When President Juan Carlos Varela took office on July 1st, 2014, Panama faced an inflationary spiral. (See page 4.)To some extent, the idea of inflation in Panama sounds odd: the country uses the U.S. dollar. There has been no sign of inflation in the United States, so why were prices escalating in Panama? Simple: Panama was in the middle of a huge economic boom. (See page 19.) Incomes were rising fast and pulling up prices.

The traditional diagnosis in such a situation is that supply bottlenecks are the cause of the inflation. In that view, the right answers are (a) wait it out; or (b) slow economic growth via austerity. There were two problems with (a). First, the inflation hit the poor hard. In Panama, unlike the United States, overall turnout tops 75% and most people are still relatively poor ... governments cannot safely ignore them the way they do in North America. Second, prices are sticky. Increases in the price of food will translate into wage increases. In a dollarized economy, that means a loss of competitiveness and a serious adjustment problem ahead. (To some extent, that is what happened to Spain during the early years of the euro.) If you can keep inflation from escalating, you should.

The problem with solution (b), of course, is that austerity is painful. And there is a diagnosis in which austerity is unnecessary. What if the bottlenecks aren’t physical? Rather, what if they are caused by an uncompetitive wholesale sector? In that world, rising demand leads to rising prices not because goods are scarce but because wholesalers and retailers are using the opportunity to take profits. If that view is correct, a big if, then the government can use price controls to break the inflationary spiral. Merchants will have lower profits, but there will be no shortages: it will still pay for them to provide goods.

My esteemed colleague in what remains of the blogosphere, Fausta, confidently predicted that shortages would result if Panama imposed price controls. (She is correct in pointing out that former-president Martinelli was a supermarket magnate!) Economists were more divided (the headline of the article is misleading) although they did universally insist that the controls should be temporary.

President Varela went ahead with his campaign promise and imposed controls. The decree with the list of the prices can be found here. The ones I recognize are lower but not that different from the price in D.C.: frex, we buy chicken breasts for about 90¢ a pound.

So what happened? No shortages. Lots of fines. A dramatic fall in inflation. The Varela administration has decided to extend the controls until July 2015. For more details you can find an August 2014 analysis from the Economics and Finance Ministry here.

In short, a victory for economic heterodoxy, hooray! (FWIW, President Varela is from the conservative party in Panama.)

Of course, with no independent monetary policy, nobody in Panama has any incentive to take advantage of the controls to, say, print money and engineer an electoral boom. But still.

So there. I am against the Chavistas because they are incompetent and authoritarian, not because they are left-wing or heterodox. May there be an election in Venezuela and may the Socialist Party lose.

February 13, 2015

1. The Greek government is calling the Germans Nazis because they figure Grexit is coming no matter what and they want to get the populace riled up as a distraction from the disasters, or

2. The Greek government will cave so cravenly on the substance that they want to have it on the record books that they supplied some expressive goods for a few weeks’ time, namely insulting the Germans and claiming that the Troika is dead and buried, or

3. The Greek government is simply full of out-of-control, ideological maniacs.

Right now it is looking like #2 — however unlikely it may sound as a model of retrospective voting and intertemporal substitution — is closest to reality. What the relevant legislatures will go along with, however, still remains to be seen. Arguably the insults and posturing have narrowed the possible bargaining space by hurting feelings all around.

Seriously, Professor Cowen? There are several other options, you know. I really would like you to explain your logic. I still don’t understand why a Greek default would lead the ECB to sink their banking system. And if that’s what you think will happen, I still don’t understand why I shouldn’t consider that to be an expression of out-of-control ideology from a bunch of maniacs in Frankfurt and Berlin.

February 12, 2015

There are a lot of questions about how modern technology is transforming society and social interactions. (For modern technology, read smartphones mediated by social media software.) What is remarkable, however, is how little we really know about how older technologies affected society and social interaction.

This paper investigates the impact of television and radio on social capital in Indonesia. I use two sources of variation in signal reception — one based on Indonesia’s mountainous terrain, and a second based on the differential introduction of private television throughout Indonesia. I find that increased signal reception, which leads to more time watching television and listening to the radio, is associated with less participation in social organizations and with lower self-reported trust. Improved reception does not affect village governance, at least as measured by discussions in village meetings and by corruption in village road projects.

That does not seem good. Maybe my Luddism does not go a far enough.

Elisabeth, I should add, has a neat paper on the effect of free rural mail service on politics in the early 20th century. From its abstract:

The rollout of Rural Free Delivery (RFD) in the early twentieth century dramatically increased the frequency with which rural voters received information. This paper examines the effect of RFD on voters’ and Representatives’ behavior using a panel dataset and instrumental variables. Communities receiving more routes experienced higher voter turnout and spread their votes to more parties. RFD shifted positions taken by Representatives to ones in line with rural communities, including increasing support for pro-temperance and anti-immigration policies. Our results are stronger in counties with newspapers, supporting the hypothesis that information flows play a crucial role in the political process

February 11, 2015

Since I am really not well versed on Greek finances, I’ve been looking at the numbers. The bottom line is that debt forgiveness will help the Greeks, but not by a whole lot this year. They just do not have a lot of money to spend.

The Greek state ran a primary surplus of 1.2%, according to the Ministry of Finance. This is rather less than the 4.5% target for 2016. It is even less than the 1.5% that the IMF projected for 2014.

Upshot: unless there is growth in tax revenues (good luck) the country will have only 0.5% of GDP to use for stimulus. (1.2% primary surplus + 2.2% from the ECB − 2.9% interest = 0.5% total balance.) That assumes that all of its principal due is rolled over or refinanced.

On the other hand, the Greeks still do not have a whole lot of room for manuever. A full default would net them only 1.2% of GDP and even that would depend on default being orderly. Moreover, their primary surplus jumps around a lot, so they will still need a lot of short term borrowing to keep the lights on.

In numerical terms, the whole battle is over 0.7% of Greece’s GDP.

Of course, that isn’t really the battle. The Greeks want two things (1) independence from Brussels/Frankfurt/Berlin and (2) avoiding the further spending cuts and tax hikes that the troika wants for this year. Much more austerity would be needed to hit the 3.0% primary surplus the troika demands for 2015.

It would seem to me that it would not be terribly hard for the Germans Europeans to relax the austerity targets for this year and next. No need for write-downs or anything that would disturb a cranky German voter. In fact, it would seem to be easy to concede 0.7% of GDP to the Greeks in a way designed to avoid offending German sensibilities. But instead we are in full fire drill mode. Why? Is the answer really only that the Greeks have been too loud about asking?

February 09, 2015

It appears that the recent attempt at Greek financial diplomacy did not go well. The link is to Wolfgang Münchau writing that the crisis is coming to a head. Münchau lists four options for Greece:

Cave in to European demands. Everyone agrees that this will not happen.

Demand that the ECB release interest payments and profits from its purchases of Greek government bonds. The problem is that this money will not be “enough.” (Quotes explained below.)

Find the money elsewhere.

Issue a parallel currency to fund domestic spending.

This all made sense, until I went to the Greek ministry of finance and pulled up monthly data on revenues and expenditures, not including interest or debt repayments. Here you have it, for all levels of the Greek government, including municipalities:

When Münchau writes that the money will not be “enough,” what does he mean? It certainly won’t be enough to make the country’s debt repayments. But the figures graphed above indicate that it should be enough to cover its current spending.

The solid line is the primary balance. It occasionally goes into the red, but it was positive for all of 2014, to the net tune of €2.2 billion. Greece has a smoothing problem, but unless these numbers are wrong it should be able to cover it easily through short-term borrowing. I have not been able to find data on the Greek government’s cash reserves. All I can tell you is that they went up by €0.9 billion in 2013 and down by €2.2 billion in 2014.

Now, the ECB may do what it can to prevent Greece from any short-term borrowing. And it may decide to deliberately wreck the Greek banking system. But from here it seems like Greece will only have to resort to option (4) if the European imperial authorities decide to take deliberate action to force it to do so.

Even if the parties involved can’t compromise on debt, it would be relatively easy to just let the Greeks default while letting them still have banks that function and a government that can pay its current bills. If that default then crashes the Greek economy, fine. So why all this threatening of additional sanctions that will serve only to push Greece out of the eurozone while costing the European government central bank a boatload of money?

The weird thing is that Greece doesn’t even want more money. It just wants an extension on loans that certainly won’t repay if the Germans Europeans unload on them with both barrels.

So WTF?

My initial guess would be that this is just bad public diplomacy on the Greeks’ part. They could have tried to frame the issue in a way that Merkel could accept without enraging the more irrational parts of her electorate.

But that guess assumes that the Germans would have been willing to make the obvious compromise that leaves everyone better off. I am not sure that assumption is correct. I therefore implore my co-blogger to write a post explaining what in the name of Mary is going on, because this all looks eminently super-easy to resolve to the satisfaction of all parties. Help?

ADDENDUM: One very perspicacious view can be found here. In this view, the Europeans won’t destroy the Greek banking system. Rather, they will inflict just enough pain to make the Greeks suffer for their inevitable default and debt write-down, but not so much that they leave the eurozone. The success of such a plan, of course, depends on Greece being able to pay its current expenditure. It also, if I understand it, involves the Greeks not paying their current debts. So I am still unclear as to what is gained, but it does seem like a plausible strategy. Go click the link.

February 06, 2015

The zero-bound is a situation where nominal interest rates hit, well, zero. In theory, they cannot then be lowered any further. After all, why would someone lose money by depositing their wealth into an account that shrank over time when they could just hold cash?

Well, it turns out that there are some reasons. Interest rates are turning negative in Europe. Holding cash has a cost.

The higher that cost, the more people will be forced into the financial system. So how can we make it really high? Well, you could ban cash, but that’s draconian.

Our suggestion? Abolish paper money. Make the largest denomination a $10 coin, weighing a full ounce. (That would be about 28 times the weight of a $10 bill.) That would $100,000 weigh about three tons. You could still store cash in your basement, but it would be hard.

Of course, eventually someone would start to allow you to deposit coins with them and write drafts against the coin piles. Oh, wait, there already is an institution that does that ...

January 20, 2015

Saudi Arabia wants oil prices to remain low for a while. The reason is that they hope to avoid demand destruction. A period of low prices could set back attempts to switch away from oil. The reason for the could is that such an effect is not inevitable. It will only happen if (a) regulators ease up on efficiency requirements; (b) consumers believe that prices will stay low forever and start making long-term wasteful investments.

I would not read too much into that last; these numbers are noisy. And I suspect that the EPA will hold firm to the new standards. (Current law requires the agency to review the 54.5 mpg-by-2025 mandate over 2016-18.)

January 08, 2015

It will be a while. We have stated some of the reasons, but there are two more to consider. First, just like the Mexican government, many U.S. firms are hedged. The price they face will not fall below $70 in 2015. Second, many U.S. firms are indebted: they need to keep generating cash flow. Ergo.

Plus the other stuff. How long is a while? Make me an offer and I might tell you. ☺

More seriously, if you can figure out a way to go long on oil and have a reasonably low discount rate, then you should do it. The price will rise and rise a lot. But it will not be this year. Nor would I bet on next year, unless you can afford a loss.

January 05, 2015

Capital controls are state-imposed restrictions on moving money in or out of a country. If you have money inside a state with capital controls, then it is legally-difficult to lend that money to foreigners or use that money to buy foreign assets. In fact, to be binding, it even has to be difficult to use that money to freely import stuff. Otherwise you could move money out simply by buying something overseas on credit, importing it, and selling it to yourself at an inflated price.

Why might a government want to impose them?

Governments sometimes impose capital controls during economic crises. They might do this to stem a panic. Say that people have started dumping assets and taking the money out of the country. (If they are not doing that, then they are likely using the money to buy other assets, which is less of a problem.) The fire sale is driving down asset prices and pushing otherwise healthy companies towards insolvency. In that situation, capital controls basically stop the foreigners from being able to dump their assets. It’s a way of forcing everyone to calm down, the way a bank facing a run might stop withdrawals for a little while.

Capital controls can also be used to give central banks the ability to fight a crisis without worrying about the exchange rate. They can prints lots of money and do other unorthodox things without the fear that people will start dumping the currency. In countries where lots of companies have foreign-denominated debt, that is a good thing.

Finally, governments can shift the pain of external adjustment by using controls. A collapse in the exchange rate has all sorts of distributional effects. If a government doesn’t like those effects, then it can use capital controls to shift them around. (Venezuela is doing this ... for so long that it long became massively counterproductive. But that is a different issue.)

Kris James Mitchener and Kirsten Wandschneider have a good working paper on capital controls during the Great Depression. What did they find?

Controls worked on the most basic level, as in governments succeeded in making it hard to take money out of the country;

Controls abetted recovery from the Depression ... but no more so than in the countries that just let their currencies depreciate;

One of the reasons for (3) is that central banks seemed very reluctant to take advantage of the manuevering space that the controls provided. In short, they stuck with basically the same policies as the countries that let their currencies float, even though they no longer needed to.

What are the implications for the current Russian predicament? I see two. If the crisis really is a panic-driven flight, then the controls may work well. The Russian government has been informally imposing such controls for several weeks, mostly by ordering state-owned businesses to refrain from taking money out of the country.

On the other hand, if the crisis is more systemic, then the Russian government could use controls to keep the ruble from plunging further while it uses its foreign reserves to bail out various companies. That might be useful! It would keep import prices from spiking and keep various exporters solvent. But it is not clear that it would really produce less overall pain than just letting the ruble fall.

The problem does not seem to be driven by a short-term panic, so it seems that the Russia government has a difficult choice. But the lesson seems to be that capital controls do not do much good unless you have a plan for using the breathing room. Does anyone in Moscow?

December 31, 2014

In October, we predicted that one of the reasons why U.S. tight oil production would not collapse in the face of low oil prices is that “when prices slump, so does the demand for all the specialized inputs that oil operations need. Geologists, rigs, roughnecks, all will cut their prices.”

Yesterday, the Financial Timesreported that the oil majors were cutting the rates they paid contractors by 10%. An oil services company cut wages for 1,300 workers. And the majors have slashed their internal pay by 15%.

The data comes from the United Kingdom, not the United States, but the same trends apply. We do not expect American tight oil (aka, “shale”) to fall significantly next year.

Only ... no. It is true that low oil prices are terrible for YPF, but YPF makes up a small chunk of the Argentine stock market. (The BCBA had a market capitalization around 3.9 trillion pesos on December 18. YPF had a market cap around 108 billion pesos.) So it is not the direct effect.

Low oil prices should be good for Argentina. The country is a net oil importer. It is also a net gas importer ... and the price of its pipeline gas imports from Bolivia are linked to the price of oil. In total, net imports could drop by $2.7 billion next year. Now, that ain’t huge in a $609 billion economy, but at 0.4% of GDP it’s not nothing.

The thing is, low prices will mess with YPF’s plans to make Argentina into the second major producer of tight oil after the United States. But investment plans were greater than $2.7 billion for 2015. A fall in investment spending could cancel out the benefit from lower hydrocarbon imports.

That still is not enough to explain the selloff. So what is it? Well, the recent decline in oil prices has all the hallmarks of a demand shock, albeit one enabled by the recent rise in North American oil production and the return of Libya to world markets. (See the chart below, from the IEA.) The economic slowdown in Europe and China that is cutting demand for oil will also cut the demand for other Argentine products. And that does not augur well for the Argentine economy.

In short, the same factors driving international oil prices down are hitting Argentina hard. But the effect is not causal.

I had plans to travel extensively in Argentina in 2015, investigating YPF. It now looks like it will not happen. Life intervenes: new job, opportunities in Albania and the Philippines, and I happen to prefer spending time with my children. (I feel for my co-blogger, who continues to travel!) And it is particularly disappointing since Argentina just may be my favorite country on the planet, both in terms of the culture and in terms of its intellectual fascination.

May 17, 2014

Vox is arguing that international investors are keeping Vladimir Putin from invading Ukraine. The logic is that investors have pulled back from Russia over the past months. This pullback has damaged the Russian economy. Therefore, to protect his economy, Putin is also pulling back from his attempts to cleave off parts of Ukraine.

Well, consider these two hypotheses:

Putin has chosen to pull back because of the economic costs (recession caused by changing investor sentiment);

Putin has chosen to pull back because of the strategic costs (the risk of involvement in a brutal counterinsurgency against fellow white orthodox Slavs).

In other words, the Vox author has proposed an hypothesis without evaluating the counterhypotheses. And in this case, the counterhypothesis is much more compelling.

To be fair, it does appear to be true that capital is leaving Russia at an accelerated pace. This was not clear in March, when the markets appeared to care little about Crimea. As we predicted here, however, the prospect of war in eastern Ukraine has been another story. Capital flight has raised interest rates and in turn damaged the Russian economy.

The problem is that it is clear that Putin has incentives to pull back even if his economy was booming. It is clear that there is no popular support for secession in the east. (See also these poll results by province.) The Ukrainian government and some large minority of Ukrainians are prepared to fight. The referenda have no legitimacy. An invasion (even one invited in by the Donetsk People’s Republic) could easily spark a war that would blow apart the nascent Eurasian Union and possibly cause Putin to lose power.

This is not to say that all big wars would have negative strategic consequences for the Russian president; it is to say that a war with Ukraine right now over this would.

So Putin is playing it smart. Even if he wants to annex Novorossiya for its own sake, he is playing it smart, because you can’t always get what you want. But if you try sometime, you just might find, you get what you need ... which is, for the Russian Federation, a federalized Ukraine that grants Russia access to the arms factories located there.

In short, the Vox author wants to believe that big interstate wars are now impossible, and so he looks for evidence that globalization or postmodern pacifism or some other thing will force Moscow to pull back while completely ignoring the counterhypotheses.

I should add here that absent deliberate sanctions or a large-scale prolonged war (both of which are strategic problems) the economic damage has already been done. If more market reactions were Putin’s only concern, then he might as well ignore the sunk costs and keep going. That is not what he is doing.

Finally, Meghan O’Sullivan has a good piece about why sanctions won’t stop Putin. Her arguments also apply to un-orchestrated economic damage.

Vox appears to be caught in a Norman Angell moment. Angell famously wrote before WW1 that interstate war had become unprofitable. Angell, however, did not believe that fact made war impossible, just that it made war stupid. That was a mistake made by others. Vox appears to be resurrecting that mistake for the 21st century.

The reason for the decline? We don’t know for sure, but the consensus seems to be the rise of the chains and the Internet. (Actually, that should be chains or the Internet; one might be more important than the other ... and the pre-Great Recession timing strongly suggests a late-1980s victory of the franchise.)

It would be reasonable to assume that this is a bad thing, in the sense of maximizing the general welfare, or at least that of near-median citizens. Slate, unsurprisingly, makes the opposite case.

It isn’t a bad case. Here is the gist:

Chains are good. They innovate more, provide things more cheaply, and grow faster.

There has been no decline in the number of small companies that grow large. The fall has been concentrated in startups that do not grow much after their foundation.

These are reasonable points. But they have to overcome one piece of evidence:

Incomes really haven’t budged for anybody in the lower 95% since 1987, save for a brief period in the late 1990s. If the triumph of the chains really were all that, then one would expect to see the opposite, no? Ditto if the growth of winner start-ups trickled down to the average American in any sort of direct fashion.

Sadly, however, all we see is stagnation. This puts the burden of proof back on Jordan Weissmann; an unsubstantiated dig at Italy for combining economic failure with lots of mom-and-pop shops doesn’t convince, because it is not clear to me either that Italy has lots of mom-and-pop shops or that they are the cause of the country’s recent stagnation.

Still, it is possible that the rise of the chains prevented the stagnation in American living standards from being even worse. Perhaps they increased labor demand, paying above-median wages and only following other establishments down after their wages dropped. Or perhaps they offered cheaper goods on a large-enough scale to cushion income declines.

April 26, 2014

In 1993, I rented with some friends a large three-bedroom apartment on Whisman Road in Mountain View. We paid $1,690 per month in 2013 dollars. ($1050 nominal.)

For a bit of 1995, I rented a one-bedroom apartment on Treat Avenue in the Mission District of San Francisco. It had its own one-car garage attached. (A very tiny garage, but I could and did park my little 1980 Plymouth Champ in the spot.) I paid $1,220 in 2013 dollars. Four years later, in the summer of 2000, I re-rented the same place for the same nominal price; the real rent had declined to $1,030.

Most miraculously, I also rented a tiny one-bedroom in Mountain View between 1995 and 1998, with occasional sublets. The rent. Hold your breath: $604 in 2013 dollars. Yes, it was terrible (the “kitchen” was only big enough for a mini-fridge) and there was drug-dealing in the cul-de-sac. (Higdon Avenue, if you know the area.) So what? It was cheap.

It may be hard to believe, but back in 1992 you could grab a two-bedroom on Alma Street in Palo Alto for $1,330 in 2013 dollars without needing to search for more than a single day. A housing search consisted of driving around looking for the “for rent” signs and then calling the landlords. This situation briefly changed during the high point of the late-nineties Internet bubble, but appeared to return to normal right after the dot-com bubble burst in early ‘00.

I cannot find what the Treat or Higdon Avenue units rent for now (although both buildings still exist, unchanged from the outside) but the Whisman Road complex is professionally managed and can be found on the Internet. There are currently no three-bedrooms available,but the website states that the floor plan we rented for $1,690 (the Gramercy) now goes for between $3,030 and $3,580. (Two-bedroom flats can be had for $3,060.) That is a real increase somewhere between 1.8 and 2.1 times our old rent.

Think about the housing market in the Bay Area and weep for America. Then get really really really angry at every middle-class homeowner in the damn state of California.

For a well-researched article on how the Bay Area got to its currently surreal point, see this piece.

The article tries to find a bit of relief in the fact that the Bay Area has a great deal of intergenerational income mobility. In San Jose, for example, a child born into the bottom fifth of the income distribution had a 12.9% chance of making it to the top fifth; San Francisco was second with 12.2%. (Mountain View is considered part of San Jose for the purposes of these data.) This puts them in the top five, along with Salt Lake City, Boston, and Pittsburgh.

So how dire can the situation be? Sure, expensive housing is bad, but the Bay Area remains good for poor people.

Only that may be wrong. Consider that the study looks at people born in 1980-82. It then measures their parents’ income in 1996-2000 and their personal income in 2011-12. The problem with using the study dismiss the effect of the recently-created housing shortage is twofold.

First, the Bay Area does not do well in some mysterious unexplained California miracle sort of way. The spatial variation in intergenerational mobility is strongly correlated with : (1) residential segregation, (2) income inequality, (3) school quality, (4) social capital, and (5) family structure. Inasmuch as the current housing insanity affects those five variables, it will alter future intergenerational mobility. High rents, for example, make it harder for poorer people to live in good school districts or partake in the collective social capital of rich areas.

Second, a lot of poor households in the Bay Area owned their homes in 1996-2000. Those homes increased immensely in value. It is quite possible to believe that the Bay Area overperformed places like Minneapolis and Houston because of that increase in wealth. If that is true, then the Bay Area will fall down in the rankings as home-ownership moves increasingly out of range. (And, presumably, as price increases slow down by pricing out even high-income buyers. Although who knows what the limit of that process actually is?)

In short: (a) The housing crisis really is never-explored territory for much of the United States; and (b) past performance may therefore not predict future results.

April 23, 2014

Randy McDonald brought this article to my attention. The title captures the argument quite well: “Argentina: The Myth of a Century of Decline.” The author is contesting an Economist article that dated the country’s decline to 1914.

Here is the key argument:

Below I will try to show that instead of a “century decline,” what characterizes Argentina’s economic evolution as compared to other countries is that it suffered a deep economic collapse from the mid 1970s to the end of the 1980s (in what follows, data is from the Maddison Project. http://www.ggdc.net/maddison/maddison-project/data.htm).

This structural break in the evolution of the GDP per capita (GDPpc) in Argentina can indeed be attributed to internal conditions in that country. But other than that, there is not much difference in the evolution of Argentina, when compared to, for instance, Australia, or Uruguay, two countries mentioned by The Economist as either not having suffered the “hundred year decline” and/or to have followed better economic and institutional policies than Argentina. It is true that other countries such as Korea or Spain, which had far lower GDPpc than Argentina during great part of the 20th Century overtook Argentina by a large margin since the 1970s. But it is also true that if Argentina had avoided the sharp drop in the 1970s and maintained the share of the US GDPpc that prevailed before that structural break, the country would have had now an income per capita above all countries in LAC and many European countries such as Portugal, the Czech Republic, Hungary, and Poland. And if it had maintained the lineal trend growth from the 1960s to the mid 1970s it would be now at about the level of New Zealand or Spain, according to the data of the Maddison Project. In other words, if Argentina had avoided the real tragedy that started in the mid 1970s, the country would be now a developed country.

I’m not sure I fully understand the argument. It hinges on a rhetorical definition of “decline” and a debate over the correct counterfactual. Contemporary Argentine opinion leaders thought their country was one of the richest in the world in 1914. Now, the author is correct that compared to Australia it was already running significantly behind (66% of per capita income) ... but Argentina had achieved a rather respectable 82% of Canada’s per capita income.

Still, 82% is less than 100%, even accounting for the difficulty in measuring these things. And there are other indicators that Argentina was in fact already behind in 1914 despite its elevated income figures. Filipe Campante and Ed Glaeser have a good comparison of Buenos Aires and Chicago around 1914. The differences?

Much higher education levels in Chicago. This was not in fact a result of Chicago’s public schools, although those schools were better and more prevalent than in Buenos Aires. Rather, it was a product of Chicago getting rural Americans and German immigrants, who were better educated than the Spaniards and Italians pouring into B.A.

Chicago was more industrialized, despite competition from the old industrial centers in the American northeast. In fact, businesses in general were more mechanized: Chicago had 2.4 times as much capital per worker as B.A.

Finally, Argentina didn’t have universal male suffrage until 1912 ... which led to riots and revolts that could and did topple national governments. Chicago had riots and political machines, but the government remained stable.

Thing is, the Economist piece makes a big deal of the Campante and Glaeser article. Why is Díaz-Bonilla different?

Díaz-Bonilla points out Argentina did not start to lose further ground against Europe until WW2 ... and he notes that fate also befell Australia. The problem is that much of Australian economic history is dedicated to explaining the country’s relative failure after WW2. Comparisons with Argentina were rife at the time as both countries slid down the league tables. I am not sure what the Australian experience proves for Argentina.

Finally, he shows that the wheels come of the slowing Argentine bus with the spectacularly incompetent military governments of the 1970s.

I understand what the author is trying to argue, but it’s not as effective as it might sound. “Argentina was poorer than people think in 1914, fell further behind (along with Australia and Uruguay) after 1940, and then collapsed in the 1970s” is less catchy than “one hundred years of decline,” but it doesn’t sound categorically different.

I think the author is trying to push the argument too far.

That said, the author makes two good points. First, the Argentine juntas really were that bad. Second, the relative decline after 1914 cut across the entire southern cone, including southern Brazil. The whole region was relatively richer in 1900 than it is today. Brazilians in particular seem to forget this point, but it is an important one to remember, especially when diagnosing Argentina’s modern economic problems.

April 22, 2014

I am beginning to think that the United States is facing a terrible housing crisis. The fact that we are is pathetic. We know how to build high-density housing in inexpensive ways. But we do not allow it. So places that boom in the northeast and California see little housing growth. But they see price explosions.

We are moving to Washington this summer. Our rent on a two-bedroom apartment (big enough for two adults and two small children) is $2525. When we moved in back in 2009 it was $2300. That is an increase of only 1.9% per year. In real terms, no change.

But the owners want to charge the new tenants $3200 for the same unit. That is an increase of 6.8% per year: well over inflation and a clear indication that something is off the rails in the Boston housing market.

The ultimate problem, of course, is that you simply can’t knock down the short buildings on this block and build more high-rises like the one in the background. It’s ridiculous. We are less than a quarter-mile from a T station; residential buildings here should reach 20, 30, 40 stories. But you can’t build them because, uh, Franklin Street is just so pretty as-is.

WTF? What in the name of God is wrong with Brooklyn? Build Brooklyn here! And for those of you in Brooklyn, go build Manhattan over there. Manhattan is great!

Here is my proposal for a tough tight restrictive zoning code.

Adjacent units shall not lose more than two hours of sunlight on the shortest day of the year unless their current occupants so agree.

Monthly rents on a third of the units in any new rental buildings shall not exceed 0.003% of the median household income in the municipality per square foot. The price of one-third of any new for-sale units shall not exceed 2.5% of the median household income in the municipality per square foot.

New developments must at least double the number of units of any housing structures demolished in their construction.

And we’re done! No parking requirements, no height restrictions, nada. Just the above. And truth be told, I would prefer to replace clause (2) with a tax on luxury units. Calling Bill de Blasio! (Or Muriel Bowser.)

Note that this is an incredibly restrictive code. Just less so than the bullshit we currently have. Historical preservation is stupid, un-American, and contributes to income inequality.

Massively. How much of the increase in income inequality is due to changes in housing costs? I suspect it is large; someone should do the decomposition.

March 18, 2014

In fact, it is scary to me that rising wealth inequality at the top make it possible to consider buying out and shutting down the entire U.S. coal industry for environmental reasons. “Only” fifty billion dollars? Private wealthy individuals making social decisions of that magnitude? Frightening.

It is unlikely to happen. First, usually when somebody tries to buy a company they have to offer more than the current market capitalization. The reason is that the price represents the marginal seller of shares. When the demand for those shares goes up, as happens when you want to buy a controlling stake in a company at once, the price goes up. So even if the $50 billion number correctly represents the market capitalization of all current coal companies, the price to buy a controlling stake would be higher.

Second, there are other costs. Much of the assets will have very little realization value, but the debts will need to be paid. There may be other hidden costs: cleanup, for example.

Finally, if one group can bid for political reasons, another group can counterbid for political reasons. That will also serve to drive up the costs.

In short, it is a provocative idea, but having environmentally-conscious rich people buy out the coal industry is (a) terrifying in-and-of-itself; (b) more expensive than advertised; and (c) is a game that other more-evil rich people can play.

Above is the RTS index for the past two weeks. The collapse on Monday, March 3rd, is hard to miss. There is a recovery over the next two days, but it is only partial. The markets did not like the Russian invasion.

That would seem to be clear-cut. The problem is that a slightly longer view muddles the issue. The vertical bars show intra-day variation, with the horizontal lines being the open and close.

On this view, the markets were terrified of an all-out war and with good reason. It would cut off most Russian gas exports through Ukraine, directly slamming the economy, and court severe Iran-style sanctions from the west ... if not outright combat. Once that fear passed, the previous downward trend reasserted itself.

If you doubt the severity of the panic, consider that the Russian central bank had to raise interest rates on Monday. That is not something that a central bank would do lightly.

In short, unlike the Russo-Georgian War of 2008, the markets did care about the appearance of Russian troops in Crimea. But it is not clear whether they are punishing Russia for the violation of international norms or whether they were panicky about the impact of an all-out interstate war right along the biggest gas export routes.

These are very different things with very different implications for international relations in the 21st century. Any ideas for how to sort it out?

March 02, 2014

It seems that I missed the last page of the essay entirely the first time around. It is shrink-the-state pablum. Save democracy by ending government. Or something.

Sorry, folks. I hope nobody took my advice on the first post. The essay has interesting insights, but ends on a sophomoric note, the kind of dime-store libertarianism I found convincing when I was twenty.

Maybe I should not have recommended the essay on democracy. I read it while playing with my boy. I am re-reading it now. And it has this:

“Plato’s great worry about democracy, that citizens would ‘live from day to day, indulging the pleasure of the moment,’ has proved prescient. Democratic governments got into the habit of running big structural deficits as a matter of course, borrowing to give voters what they wanted in the short term, while neglecting long-term investment. France and Italy have not balanced their budgets for more than 30 years. The financial crisis starkly exposed the unsustainability of such debt-financed democracy.”

WTF? No no no no no it has not! Both countries have entirely sustainable debt loads. Even given that they have abandoned their own currencies they have sustainable debt loads.

What in the name of God is the author talking about? The essay is a weird mash. Lots of good points, some subtle, with the occasional bizarroland statement that reads like it was tossed out there to make sure the Tories (and Republicans) keep reading.

February 04, 2014

I have a huge backlog of Argentina posts. Life and work kept me from posting most of them. I will start to try to rectify that.

I earlier mentioned my first contact with Argentina’s exchange controls, in May 2012, when I saw a Brazilian couple stopped by police and arrested on Calle Florida.

In May 2012, the breach between the blue market rate and the official rate was not serious. It was still reasonable for a tourist to avoid the hassle. The business pages had stories about companies that were having problems with a lack of dollars, but nothing particularly serious and nothing that would affect day-to-day life.

By June 2013, the gap had become more serious. No tourist in their right mind would buy pesos at the official rate. For the rest of the economy, the economic effects were relatively small but beginning to be felt. Imagine, for example, that you were an Argentine manufacturer. Some of your inputs are imported. If you wanted to import them at the official exchange rate, then you would have to apply to the central bank. The red tape was increasingly onerous. (The negative effect of the controls on trade is part of Argentina’s ever-worsening beef with Uruguay. They have also brought down a host of WTO suits.)

It was possible for firms to work around the controls, but that was costly. There were two varieties of workaround. The first was to buy or contract with an export business which would earn dollars outside Argentina. Those dollars could then be used to purchase imported inputs. Pirelli, for example, makes tires in Argentina. It partnered with a honey exporting business in order to meet its import bills. As you can imagine, the honey exporters did not provide this service for free.

The second workaround involved the blue-chip swap market, in which a company would buy foreign securities with pesos and then sell those securities for dollars. That market, however, was costly to access ... after all, you had to convince somebody who owned foreign securities to sell them to you for pesos. They would not do so at the official rate.

Still, as late as last summer, the controls were more of an annoyance than a disaster. Companies that needed to import could do so, even if they needed to pay extra for the dollars and their shipments took forever to get through customs. Moreover, many imported inputs could be swapped out for local substitutes. Inasmuch as the Argentine authorities wanted to promote self-sufficiency, the implicit trade restrictions were a feature, not a bug.

There were some weird effects, of course. For example, demand for high-end cars soared. The cars were imported at the official rate but sold at the blue market rate, providing an irresistible bargain for anyone who earned in dollars. (Luxury cars were also considered an inflation hedge, but that was just people being silly.) In addition, luxury goods began to vanish, since there was no easy way to (say) replace an Ermenigildo Zegna suit with an Argentine substitute. But that was also minor: I still have two $200 local suits that I bought in Buenos Aires back in 2005. They started to generate lintballs fairly quickly, but they have not frayed. An annoyance, not a disaster ... and for a left-wing government you could even call the disappearance of imported luxury items an additional bonus.

The problem is that the macroeconomic imbalances have continued to worsen. The costs of getting dollars (or clearing customs) have gone higher and higher.

And so, since it turns out that Argentine-sold ketchup is actually made in Chile ... McDonalds has just run out of the red stuff.

OK, that is minor, and an Argentine substitute will be found pretty easily. But these sorts of problems are starting to pile up. At the limit, you make imports impossible and wind up with Venezuelan-style shortages, only without a giant oil export machine to cushion things.

Argentina is not Venezuela. The policy is fast-approaching its breaking point. The government is terrified of an inflationary spike, but there are worse things. (Like fuel shortages.) The recent liberalization is going to continue. Soon enough Argentina will be a normal high-inflation country, rather than an odd throwback to the 1970s. The liberalization will not be easy (the government needs the dollars to pay debts!) but the alternative is politically worse.

Either that or they will have to figure out how to make do without imports.

January 31, 2014

Three recommendations. First, for those of you with a casual interest in the topic, there is a very brief review paper by Joseph Ferrie (Northwestern) and Timothy Hatton (Essex) on the last two centuries of international migration. (The paper actually covers the last four centuries, although it moves quickly over the 17th and 18th centuries.)

Second, Paul Collier’s new book, Exodus. It is a very well-written and thought-provoking brief in favor of immigration restrictions. If you click the link, it will take you to multiple reviews of the book. Most of the negative ones are tendentious and a little strange. This fellow here argues that countries should abandon all income redistribution in order to facilitate open borders. In that, he concedes Collier’s main argument, which is precisely that unlimited immigration could destroy the national sentiments that underpin liberal democracies. (Collier has a fascinating discussion of the theoretical circumstances under which this might happen; it is not a blanket argument. A blanket argument would obviously be stupid.) Nathan Smith at Open Bordersstarts by conceding Collier’s main point and calling for countries to impose special taxes on migrants instead of preventing their entry. (As an American, I recoil at that idea: differential taxation based on birthplace is contrary to the 14th Amendment. It is an odd suggestion for a proponent of open borders.) He follows up by saying that democracy is bad as part of an attack on Why Nations Fail, by Jim Robinson and Daron Acemoglu.To be fair, I am not sure that he realizes that he is arguing that democracy is bad. (I should mention that Jim Robinson is a friend.) Kenan Malik argues against a caricature of the book. One of the best parts about Exodus is how Collier lays down the conditions under which a diaspora will grow indefinitely and those under which it will not. Malik, however, writes, “A key argument in Exodus is that the levels both of migration and of problems created by it are linked to the size of diasporas.” Well, sometimes! But not always. I was left unclear what troubled Malik, other than that Collier is wrong about Great Britain. (Not being British, I can’t say, although Collier explicitly gives large shout-outs to the U.S. and Canada for our ability to assimilate immigrants.)

January 28, 2014

The Syrian government, unlike the Venezuelan one, allows data to be published on the black market rate for the Syrian pound. There are occasional crackdowns, but in general the market is open. In fact, the Syrian central bank regularly engages in currency transactions at what it calls the “intervention rate,” often to stabilize the black market rate. It is much more of a gray market than a black one, akin to Argentina’s “blue market” for the peso.

The below chart shows the gray market value, derived from more-or-less weekly quotations found in the Syria Report.

Before the war, Syria had a fixed exchange rate, with capital controls, but the central bank could more-or-less supply enough the national currency at the pegged rate. There was a brief run on the pound in May 2011, when the government deployed the Army against the protestors. The central bank then tightened exchange controls and flooded the market with dollars. Things rapidly returned to normal.

Problems emerge around the end of 2011. In March 2012 the value of the pound plunged, but heavy dollar sales by the central bank soon stabilized the market rate. In July 2012, there was another brief crisis when the Free Syrian Army attacked the National Security building in Damascus.

The wheels started to come off the bus around the end of 2012, probably because that is when it became clear that inflation was starting to accelerate . The government briefly got a handle on things, but the pounds almost continuously lost value throughout April and May of 2013. In June, however, it looked like the central bank had regained control.

The big crisis hit in June 2013, when the Obama administration announced that it will arm the rebels. Interestingly, the central bank restabilized the currency a month before the first credible accusations of large-scale chemical weapons use by the Syrian regime. The threat of Western attack did not cause any large-scale currency dumping in favor of dollars. That might have been because nobody in Damascus worried about an attack, or because they thought it would do little harm, or because of something else. At worst, the threat of war may have slowed the rise in the Syrian pound back to 150.

(An earlier version of this post transposed sentences dealing with 2012 and 2013. A good timeline can be found at Politico, of all place.)

Since then, the market seems to have more-or-less stabilized. Take what you will what this says about the projected lifespan of the current Syrian government.

January 22, 2014

In the mid-1980s, I handed out flyers on an Upper East Side streetcorner for a now defunct drugstore chain for $4.25 per hour ($9.07 in 2012). During the summers, I cut fiberglass and installed ducts in Miami for $5 an hour ($10.70 today). The minimum wage at the time was $3.35. A bump in the minimum was not likely to affect my employment prospects.

And it seems a little counter to the hypothesis that in his second two examples teen employment accelerates above his post-hike trend well before his two-year post-hike window closes. And then there is 1996.

So ... four of his seven two-year post-hike windows are coterminous with recessions. (Perhaps minimum wage hikes cause recessions?) And two (1961 and 1996) don’t say what he thinks they say. That leaves 1967. I guess. Maybe.

January 16, 2014

The U.S. Chamber of Commerce just issued its new energy plan, an update to its 2008 plan. The 2008 document was favorable to hydrocarbons, but it included a call for reducing the environmental impact of energy consumption and investing more in climate science, as well as a call for the U.S. to lead on climate change.

The new plan, not so much. In fact, not at all. And why not? Well, Karen Harbert, CEO of the Chamber’s Institute for 21st Century Energy: “It is a different world in 2014 than it [was] in 2008: We are dealing from a hand of strength.”

But none of them want to admit that they plan for a carbon price! One colleague of mine recently completed a case on a large hydrocarbon project. The company refuses to release the case unless he removes all references to the fact that the company builds a carbon price into all its financial analyses ... even though the cat is out of the bag on the fact that all the major energy companies (and a lot of other ones) do just that.

WTF, you may ask? Well, the answer is simple. The Times is incorrect when it writes that the use of carbon pricing in boardrooms is part of “a deeper rift in the [Republican] party, as business-friendly establishment Republicans clash with the Tea Party.” It is not.

Rather, it represents the fact that the energy companies do not believe that the odds are against then in the fight against carbon emission restrictions ... but that they also believe that there is a chance that they win. Publicizing their internal use of a carbon price gives aid to their enemies who want to impose one. But ignoring the likelihood that one is coming will only hurt their shareholders. Thus, they build one in.

The similarity to the quiet rooms in which Mitt Romney believed that income inequality should be discussed is not a coincidence.

P.S. One implication that should not be drawn, however, is that a carbon price (or regulation) won’t affect CO2 production if companies are already taking it into account. There are two reasons why it will still matter. (1) The big companies aren’t the only CO2 emitters. (2) The big companies will only invest if the projects make sense with a carbon price; nonetheless, those projects will produce less if carbon prices or regulation raise the cost of their product.

First, schools. There were about 350,000 students enrolled in the Lebanese public school system. (If that number seems small for a country of 4.4 million people, it is because most Lebanese send their children to sectarian schools.) The Ministry of Social Affairs (MOSA) reported that 33,000 Syrian students have registered since the start of the war, at a cost of about $1,000 per student. (Only 0.4% of government revenue.) The good thing? Syrian schools still have a spare capacity of 90,000 seats. The bad thing? That capacity isn’t where the refugees are. UPDATE: The really bad thing? Even 90,000 would not come close to providing seats for all school-age refugees.

Second, health care. The national government is hands-off, leaving it to NGOs, UNHCR, and local governments. So far, UNHCR has covered about 85% of health care expenses, but MOSA reports that Lebanon is on the hook for $425 per refugee annually, born mostly by local governments. MOSA also reports a total cost of $267 million (2.8% of revenue) ... the implication being that they still have not accounted for the full impact of the current refugee population, let alone what might arrive in the next few years.

Third, public services. MOSA estimated that in 2012 local governments and electrical utilities needed $450 million, or 4.8% of total government revenue, to cope with additional strains on garbage disposal, water provision and electrical grids. Next year MOSA reports that the cost will jump to $1.2 billion ... a very substantial 13% of total revenue. And this in a country that still has not recovered from the damage the Second Lebanon War wreaked on the grid back in ‘06; peakload gaps range as high as 40% of capacity and brownouts are endemic. The state-owned Electricité du Liban has its work cut out for it.

Fourth, inflation. Last year, inflation ran 10.1% in Lebanon. Now, Lebanon has had some recent issues in collecting CPI data. Even if it hadn’t it wouldn’t be fair to attribute the increase from 4.4% to 10% to the refugees. But what is telling is that inflation has jumped by much more in the areas that have received a lot of refugees: 40% in Labweh, 50% in Tyre, 100% in Majdel Anjar and 200% in Saida.

Finally, jobs. In agriculture, the Beirut Research and Innovation Center study commissioned by Oxfam reported that Syrians in rural areas are willing to work for $6 a day, against a prevailing local wage between $15 and $20. That said, in many regions local authorities reported that the refugees had little effect and in at least one district, Aley, locals are grateful for the opportunity to rent spare rooms to the newcomers. (Page 40.) In general Lebanon has been doing the right thing in a tough circumstance regarding the refugees, but the government has made one boneheaded move: the Ministry of the Economy has ordered the police to prevent Syrian refugees from opening businesses. (Also page 40.)

(The photograph above is at a restaurant south of Beirut founded and run by Palestinians; stopping Syrians from doing the same seems idiotic, although I can understand the political pressures the government is under to do something.)

I do not know how easy this will be if the number of refugees continues to grow. And I am certain that the political reaction is going to be very bad if this goes on. (The war, of course, has already spilled over to some extent.) But so far, despite serious pressure, Lebanon has coped remarkably well.

November 18, 2013

Brad Delong wonders why the signers of a 2010 open letter to Ben Bernanke have not recanted their views in light of inflation’s stubborn refusal to accelerate.

The reason, of course, lies in the text of the letter. (Disclosure: I am friends with two of the signers and have an immense amount of respect for their work.) Before I explain, here is the text:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

The reason lies in the first paragraph. “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”

First, they said only that QE risked inflation, not that it would cause it.

Second, they said that QE would fail to “achieve the Fed’s objective of promoting employment.” That certainly does seem to be the case, no?

The right question for the signers, I think, would be whether the failure of inflation to appear has caused them to reconsider their opinion about the efficacy of quantitative easing. But it is true that the wording of that sentence allows the signers to truthfully claim that they thought the policy ran risks with no hope of reward, which is a different thing from saying that they predicted rampant inflation in the letter.

October 23, 2013

Currency unions are a hot topic, for obvious reasons. The Eurozone has gone spectacularly off the rails. There is some evidence that currency unions boost trade (see Andy Rose here and here and this post) but considering the rolling disaster that is southern Europe many would consider that a small gain.

Therefore, a recent paper from Andy Rose has attracted a lot of interest: he finds that currency regimes have no systematic effect on macroeconomic performance. That is quite a find! It implies that the southern European countries would have been in trouble anyway. I found it via Tyler Cowen, who led me to comments by Paul Krugman and Antonio Fatas.

Except there is one thing about the paper. Page 3: “I exclude
from the sample the five systematically important economies of China, the Eurozone,
Japan, the UK, and the USA.”

Neither Krugman, Cowen, nor Fatas mentioned that the Eurozone countries are not in the data set; perhaps it is too obvious? It is still a great paper. And Tyler Cowen provides a solid explanation of the results.

But I am not sure that it tells us anything about the effect of the euro.

October 01, 2013

Computers have made some startling advances lately in things like voice and object recognition. Put it together, and we are beginning to see some signs that our glorified typewriters-cun-filing cabinets are turning into the robots and computers of classical science fiction. Which brings us to the obvious question: what will they do to the labor market?

A recent paper tries to answer a more limited question: what percentage of jobs are susceptible to computerization? If that number is small, then there is nothing to worry about. If that number is large, then we have to hope that new human-only jobs will emerge that most humans can do ... or watch income inequality expand to unseen levels.

To make this analysis useful, you need to do three things. First, you need to estimate the limit capability of computers. That is, what will they be able to do once Moore’s Law comes to an end. (For the nerds: Koomey’s Law is just as important in this context. After all, a robot that consumed $500 per hour worth of electricity would not be very valuable.)

Second, you need to identify the current jobs that these hypothetical future computers will be able to replace.

Third, you need a methodology that provides you with an upper bound. Why an upper bound? Because the second thing above pushes your estimates upwards. After all, jobs change ... but any reasonable identification strategy will have to identify computer-susceptible jobs as they are and not as they could be. That already implies significant upwards bias, so in order to get a useful estimate one should run with it. That won’t help much if the percentage of computerizable jobs that you come up with is 98%, but it will help if it is, say, 60% or 40% or 25% ... it will provide a useful ceiling.

OK, so how does the paper stack up?

In terms of the raw theory, not too bad. They take a well-worn Cobb-Douglas production functionand replace labor with three labor inputs: perception and manipulation tasks, creative intelligence tasks, and social intelligence tasks.

In terms of its time horizon, it goes out about two decades, to 2035. “The main challenges to robotic computerisation, perception and manipulation, thus largely remain and are unlikely to be fully resolved in the next decade or two.” (Page 25.) This makes me vaguely unhappy: the big challenges are what happens after that, at the limit. After all, my boy will be my age in 2055 ... and if I live as long as my father did, I will also still be around.

If terms of data ... ugh. They used BLS data to group 702 jobs in terms of the three labor inputs. They then validated that model by using the BLS data to ... predict their subjective evaluations.

The results is that restaurant cooks and models wind up in the same easily-computerizable category as radio operators and cashiers. Down on the hard-to-computerize side, we have logisticians ranked with the guys who work in boiler rooms. (The latter is probably not what you think.) Both are hard to computerize ... but the latter is much harder. (I should add that I have worked in both fields, albeit very briefly and in one courtesy of the Army.)

Is there a non-intuitive way to test the plausibility of the rankings? Carlos Yu and I think we might have one. The less-computerizable jobs should also be the jobs where employees have more leverage over employers. Technically, you could use the the negative log
of computerizability as a measure of bargaining power regarding future
earnings. In Carlos’ words: “That works fine for
data entry and telemarketers, who have -log(.99) ~ zero bargaining power, but
given the weight of teaching, counseling, and nursing professions on the low-computerizability end of the scale, it suggests other factors are in play.”

In short, an intriguing paper, with what looks like the right methodology ... but not one that gives a useful roadmap to 2035, let along 2055 or 2100.

September 24, 2013

The World Bank publishes a useful time series entitled “oil rents.” It is a variable defined as the difference between the cost of extracting oil and the value of oil production. It’s utility is obvious. The variable gives a measure of how much value there is to fight over along the value chain in the country — between governments, upstream producers, midstream transporters and (if applicable) downstream refiners. You can use it to test all sorts of hypotheses about oil politics and the industrial organization of the sector. All there, right on the World Bank website.

Which is where I learned that oil rents by the World Bank are not the data you are looking for.

The definition of oil rents, remember, is revenue minus cost. Revenue is more complicated than you might think, since oil prices vary according to the quality of the crude and the difficulty of getting it to a port. Still, the price of oil can be estimated well enough. The problem is cost.

For most countries, the World Bank cost
data come from one year: 1993. Only the costs for Latin American countries come from another year: 1981. The oil rent data assume that these real costs over time are constant, which, to put it mildly, bears no resemblance to reality. It is a particular problem for countries
that produce heavy oil, such as Canada and Venezuela; or countries that have
invested heavily in secondary recovery of declining fields, like Norway and Mexico; or countries that have discovered new technology to develop previously inaccessible reserves, like America and Brazil.

Other
countries are assigned values given geographic proximity and a similar ratio of offshore to onshore production — which is even crazier than assuming that real production costs did not change between 1980 and 2012. Brunei’s production costs are not Indonesia’s, for example, and
Chad bears no relation to Gabon. God only knows how they estimated costs in Central Asia.

In short, what seems like an awesome data set turns out to be not so useful once you dig through the metadata. The number simply moves in parallel with total oil revenue: there is no new of variation.

Buyer beware. Sometimes you gotta get a broom and clean up the numbers yourself.

September 03, 2013

Old news, I suppose. It did not register with me at the time. This story makes it more personal and speculates about causes.

It is horrifying. And preventable.

Which is why I believe that as a society we are going to completely botch the ever-greater penetration of robotics and weak artificial intelligence into the economy. Please read the links and tell me why I am wrong. Please.

August 12, 2013

A Chinese company wants to build the world’s tallest skyscraper. As a result, there has been a lot of discussion about the “skyscraper index.” Does the groundbreaking on Sky City mean that the Chinese economy is about collapse? Is the world economy at risk?

Maybe. It could. I am on-record as a medium-term China bear. But that is really not what Sky City means. No, the real meaning of Sky City is the same as the meaning of the locks on the Panama Canal expansion: China’s manufacturing model has reached its limits.

What do the Panama Canal expansion locks have to do with Chinese manufacturing. Well, below you can see a video of the Panama locks being loaded onto the ships that will take them to Panama; they should arrive next month.

You got it: the locks are being built in Italy. Not China. In fact, very little of the equipment for the expansion is coming from China. Engineers on the project told me that Chinese work was cheaper, but they judged it too shoddy and unreliable.

The upshot is that something is broken at the heart of China’s manufacturing model, at least as it concerns high-performance large-scale capital goods. If nothing else, Sky City exemplifies that concern.

July 18, 2013

The Syrian economy is in bad shape. But it is not in bad shape for a country fighting a total war. And that is what matters.

The areas under government control are in total mobilization. What matters are physical limits, not “money” in the colloquial sense. If it can be produced and the government needs it, then the government can tax it, borrow it, conscript it or buy it with freshly printed money. Syrians may be liquidating their investments in-country and using the receipts to buy assets in Lebanon and Turkey, but the farms and factories in government territory are still there. (Aleppo may be a different story; there are reports of machinery being packed up and moved wholesale to Turkey.)

Total mobilization means that the resources available to the Syrian military have considerably increased. Figures in a report by the United Nations Relief and Works Agency (UNRWA) can be used to calculate real military spending in 2000 pounds. Expenditures have gone up from S£30.2 billion in 2011 to S£95.6 billion (at an annualized rate) in 2013. And this despite a drop in real GDP of 51% from the 2010 level!

And do not discount what Syria can produce at home. The textile industry was based in Aleppo, and Aleppo is not producing much at the moment: the headline decline in real manufacturing activity over 2010 is 88%. But Syria is producing what it needs to produce to keep the war machine moving: the same DIY techniques used by the rebels are available to the government. (By the way, click the DIY link! It is amazing.)

Will manufacturing recover? I suspect it will. During the Mexican Revolution, manufacturing output collapsed in 1914-16, when battling armies interdicted the railroads. Once the fighting settled down, output recovered rapidly. The below map shows how fighting not only divides rebel territories from government-held ones, but divides up government-held territories. Once the government establishes secure internal routes, the sector will rebound.

I will be surprised if the manufacturing sector does not start to grow rapidly, even if the fighting continues. It will not reach its previous levels, but it will recover.

There is one hard limit, however: imports. Syria needs imports of fuel, food and replacement parts. It cannot tax or print pounds for those; the government needs hard currency. In 2012, oil exports fell to 164 thousand barrels per day (see page 8) down from 385 in 2010. Production is down because many of the oil fields are either under rebel control or need to export through rebel-held territory. As a result, exports have dried up.

But the Syrian government is making do. First, it is spending down its reserves. Second, it is scrounging around for foreign resources wherever it can. Third, it is rationing imports to preserve foreign exchange. Finally, it is getting a lot of support from Russia, Iran and Venezuela. (The report at the link is worth reading. Platts, by the way, tracks tankers into Syria, although you need to pay for the data. It is a lot of tankers.)

The aid from the axis of unpleasantry — Iran, Russia and Venezuela (and to a lesser but surprising extent Angola) — is not completely free. Syria is falling into debt to pay for it. (In the Venezuelan case, it swaps crude for refined products.) But the debt is manageable. According to UNRWA, foreign debt has gone from 7% of GDP in 2010 to 17% this year. (See page 18.) That is a long way from a solvency crisis.

If import shortages or economic problems were causing trouble for the Syrian military, one would probably expect the effects to first be felt in the air force. Data on the number of airstrikes compiled by the Institute for the Study of War, however, does not support that hypothesis:

The only way in which the economy could cause the regime to collapse would be a generalized revolt against the harsh conditions of total mobilization. But that ship seems to have sailed a long time ago. Shortages may be widespread, unemployment massive, displacement horrible, and food rationed. But its ability to fight continues.

July 06, 2013

Anyway, the big news from Venezuela is that President Maduro has announced that he will grant asylum to Edward Snowden. I think that calling the move “illegal” is too much: there is nothing wrong with a government pre-emptively announcing that it will give asylum to somebody once they legally qualify for it. More problematic is that Mr. Snowden is a terrible candidate for asylum.

Some seem to think the action is a reaction to the way American allies stopped Evo Morales’ jet, but I doubt that. I have been waiting for Cuba or Venezuela to make a move ever since President Correa decided that there was no gain in tweaking the United States. My guess is that Putin is sick of the problem and asked Maduro to announce.

Of course, the question now is: how does Mr. Snowden get to Caracas?

And what does this have to do with goldbuggery?

Well, back in 2011 the Venezuelan government decided to transfer 211 tons of gold reserves from outside the country (47% was held in London). The move did not really make much sense. Central bank reserves are immune under international law, so there was no reason to fear foreign legal actions. But hey, it sounded good and on January 31, 2012, the central bank declared “Mission Accomplished.” (They only moved about 150 tons, but close enough.)

It was pretty stupid to physically move the gold to Caracas. After all, if you wanted to use it to pay for something you would now have to either move it out or trust that your counterparty would accept a paper claim to gold located in Venezuela.

But Chávez did not seem to be playing an economic game. The move was for show. President Chávez wanted the central
bank to go long on gold. So it moved gold to Venezuela and moved more than 70% of reserves to the metal.

Unfortunately, economics comes back to bite you. The recent slide in gold prices is creating major headaches for the government. It comes at a bad time. As predicted here, the major threat to the Venezuelan economy is a sudden stop of foreign capital inflows. With reserves both illiquid and falling in value, that is becoming ever more likely.

Taking Snowden feels similar. A political move, intended purely for show, but with serious logistical issues, no practical current gain and a potential future liability. The revolution continues in form, I guess.

July 03, 2013

I just got back from Argentina. Great country. I could get a huge filet mignon for $19 in a very nice part of town. With free champagne.

The reason I could take advantage of cheap prices in Argentina was that I bought pesos at the “blue market” rate, 7.8 per dollar at retail rather than the official rate of 5.35. (That steak, for example, would have been $28 instead of $19.) As much as a bargain as that was, however, it would have been ever better in May 2013, when the blue market rate touched 10.5. ($14 steaks!) Since then, however, the peso has strengthened enormously.

But why has the peso strengthened? Beyond Brics suggests that the reason is that the Argentine government has cracked down on the market. The crackdown is real: I should not write about how I accessed the market, but I will say that it was a great deal shadier than the last time I was there in May 2012. (And let me say that the crackdown is not starting from an easygoing level: back then I saw a Brazilian couple arrested by police with dogs because they mistakenly thought they were dollar dealers!)

But is the crackdown why the peso has strengthened on the blue market? When law enforcement cracks down on illegal drug markets, a rise in the price of illegal drugs is taken as a sign of success. After all, the point of cracking down on illegal drug markets is to make illegal drugs harder to get and thus more expensive.

So ... if the Argentine government were succeeding in combating the illegal dollar market, shouldn’t the price of illegal dollars be going up rather than down?

June 14, 2013

I just read a very good essay by Andrew Mwenda in a Ugandan newspaper. (I am not in Uganda.) Here is the conclusion:

Could post independence governments in Africa have performed
better? Perhaps, but at a price; they should have aimed at preserving their
limited capacity; using it only sparingly. Instead, most governments in Africa
moved fast to elaborate public functions. Botswana avoided this mistake perhaps
because it had had an almost absentee colonial state. This could have reduced
the demands for rapid africanisation. But acting like Botswana would have been
a purely technical response to what was actually a burning political problem.

The nationalist struggle for independence emerged to challenge
legally sanctioned exclusion of Africans from state power outside of
traditional institutions in colonial Africa. That was its fuel. Upon
independence, the first demand therefore was rapid africanisation. Although
technically disastrous, it was politically popular. The second demand was
derived from the first. Africans wanted to take public services to the wider
population. Few governments would have survived by resisting this demand.

Political pressure for africanisation undermined the meritocratic
systems of external recruitment and internal promotion that allowed the civil
service to uphold its high standards. Rapid elaboration of functions without
existing capacity made a bad situation worse. What was politically right was
technically disastrous. And in our ethnically heterogeneous polities, promoting
social inclusion – even on the face of things – was more politically desirable
than sustaining technical competence. The problem is that it eroded competence
and allowed cronyism and corruption to flourish. Politics is costly and Africa
had to pay that price.

Many African elites focus on technical failures in Africa and
ignore the political compromises that brought that failure. In other words, the
price of political compromise was technical failure. It is possible that if
such compromises had not been struck, many states in Africa would have
collapsed under the weight of civil war. It is remarkable that African leaders
who inherited fictions of states left behind by colonial rule were successful
at creating a common national consciousness. This has sustained the sovereignty
and territorial integrity of these nations. Today, few states in Africa have
fallen apart like Somalia. In others, the state may not be omnipresent yet, but
the concept of nationhood has gained a lot of ground.

I find this a fascinating hypothesis. How to test it? Ted Miguel provides partial evidence from the Kenya-Tanzania border. The border sliced through the same diversity of ethnic groups on both sides, yet villages on the Tanzanian side find it much easier to muster collective action and raise resources to provide public goods than otherwise identical Kenyan counterparts. Ted’s work, however, just indicates that nation-building strategies can work. It doesn’t quite get at Andrew Mwenda’s hypothesis.

I wish I saw an obvious way to operationalize the hypothesis. Calling Suresh Naidu!

June 06, 2013

UPDATE (June 13): The Santos administration just announced that it intends to redenominate the currency by the end of 2014.

President Juan Manuel Santos has long wanted to chop three zeros off the Colombian peso, which trades around 1,800 to the dollar. Except for Paraguay, the next weakest in Latin America are the colón and the Chilean peso, which bounce around 500. (Wikipedia has a list of the smallest-value currency units here.) In October 2011, the proposal failed in the Senate by a vote of 41-15. In September 2012, the President reopened the idea, but by February 2013 it was clear that it was not going to happen in this legislative session. The idea remains current, however, and I will not be surprised if it comes back after the peace talks with the FARC are sorted out.

Redenominating the currency is not crazy: France got rid of two zeros in 1960; Israel revalued by a factor of 1,000 in 1986 as did Russia in 1998; Peru hacked off six zeros when the sol replaced the inti in 1991; the next year Argentina cut four zeros off when the peso replaced the austral; Mexico sliced off three in 1993; Turkey hacked off six in 2005; Mozambique redenominated by three orders of magnitude in 2006; Ghana introduced a new cedi at 10,000-to-1 in 2007; and Venezuela chopped off three in 2008 with the introduction of the bolívar fuerte.

The direct cost of introducing a redenominated currency would not be insignificant. In 2010, the Colombian government estimated it around $123 million. (In a sign of the problem with high-denomination currencies, that number turned into $123 thousand on an English-language website!) Printing new bills is cheap: 84% of the cost would come from minting new coins. There would also be an additional $32 million spent in advertising and explaining the change, for a total cost of $155 million.

(Side note: in Ghana, coins were basically out of circulation by the time the government proposed redenominating the cedi. Since coins had to be reintroduced anyway, the monetary cost of redenominating was tiny.)

So why bother? The issue is understudied, but the economics literature (such as it is) focuses on credibility. Few currencies (I am tempted to say none) are denominated in hundreths or thousandths of a euro for long-standing historical reasons. Rather, it comes about either because of a burst of triple-digit inflation (say, Mexico in the 1980s), outright hyperinflation (say, Argentina) or a long period of relatively moderate double-digit inflation (like Colombia; see the below chart.)

So the big economic reason to redenominate, then, is to reiterate that the inflationary period is over, kaputsky, finis. Over here, the Banco Central de Venezuela states four reasons that boil down to making mental math easier and one which says “Leave behind the consequences the history of inflations of the past had on the currency.”

Layna Mosley at UNC-Chapel Hill tried to figure out why countries redenominate. She hypothesized that credibility might be a reason, of course, but she also thought that conservative governments would be also be more likely to redenominate for reasons of national pride. Her evidence was supportive, but not compelling.

Colombia, however, mostly fits her model. (You can read the Colombian authorities’ reasons for wanting to change.) In addition to standard discussions about credibility and easier math, the central bankers mentioned the feel-good pride effect from having a serious currency valued at around half a dollar (or euro or real) instead of some teeny tiny amount. “There is possibly a positive psychological impact since it
reduces the gap between local and foreign currency denominations.”

“A countrywide redenomination exercise would also mean all
citizens had to exchange their currency, and this could potentially shed light
on the country's vast shadow economy. It is thought that drug cartels which
operate in Colombia trade mainly with greenbacks. However, officials do not
have any definitive figures that prove the extent to which pesos are used in
drug trade, and a wide-scale currency exchange could help in this respect.”

May 29, 2013

It is a bit of a truism that property rights are key to economic development. An efficient system, runs the logic, needs to be transparent, transferable, excludable, and enforceable. In a bit more detail:

Transparent means that it is cheap and easy to find out who owns what.

Transferable means that it is cheap and easy to sell or transfer property rights from one entity to another.

Excludable means that if you own the rights to a piece of property, then the law allows you to exclude others from enjoying those rights.

Enforceable means what it says.

Without those characteristics, runs the logic, you get underinvestment and confusion and commons-tragedies and all that. And the logic has some empirical backing. For example, in 1986 the Buenos Aires provincial government offered a group of landowners compensation for land that had been seized by a group of squatters. Some landowners took the offer, and the province then transferred title to the squatters. Others did not. On the assumption that the squatters had no way to know whether the landowner from whom they had seized the land would take the provincial offer, Sebastian Galiani and Ernesto Schargrodsky found that the squatters who received titles invested more in their homes and the education of their children.

“In this age of satellite imagery, digital records and the instantaneous
exchange of information, most of Greece’s land transaction records are
still handwritten in ledgers, logged in by last names. No lot numbers.
No clarity on boundaries or zoning. No obvious way to tell whether two
people, or 10, have registered ownership of the same property.”

The article goes on to say that even the former Yugoslav states have better land rights.

One reasonable conclusion would be that bad property rights are a drag on economic recovery. “Many experts cite the lack of a proper land registry as one of the
biggest impediments to progress. It scares off foreign investors; makes
it hard for the state to privatize its assets, as it has promised to do
in exchange for bailout money; and makes it virtually impossible to
collect property taxes.”

But another reasonable conclusion would be that the evidence about the importance of clear property rights is wrong ... or at least oversimplified.

There is no getting around that fact that Greece became a rich country despite terrible property rights. The above chart tracks GDP per worker in 2005 dollars (adjusted for purchasing power) for four countries from 1950 to 2011. (The data through 2010 is from the Penn World Tables 7.1; the 2011 data comes from the OECD.) In 1950, Greek workers produced as much as Colombian ones; they were significantly less productive than in Mexico. Over the next three decades, Greece far outdistanced its Latin American counterparts. The current depression has not eliminated that gap.

Greece, of course, had many advantages that Colombia and Mexico did not, but poor property rights did not stop the country from taking advantage of them.

It has to make you wonder. Despite the micro evidence from places like Argentina, are efficient property rights really as important as we think they are?

May 26, 2013

I am in Colombia for many reasons. One is to start a big research project. Another is because I like the country. But the main one was to attend a conference on mining put on by the Universidad de los Andes.

“In his presentation, Noel Maurer, a professor at Harvard
Business School, said ‘there is no curse’ from the resources created by mining
discoveries. For him, there is no evidence from any country where either
democracy or development has severely deteriorated after an increase in income generated
by mining activity.”

That is worded a little more strongly than I would like (you can find some evidence of a resource curse in Nigeria and Zambia, and it is unlikely that the 1997 crisis would have unseated Suharto at a time of high mineral prices) but it does about sum up my opinion. To be fair to El Tiempo, they added my caveat in this tweet.

Lina Holguin of Oxfam-Québec tweeted in response to my caveat, “Congo, Chad and Niger...????” I would answer by saying that while all three countries are poor and unstable, there is no evidence that they would be less poor or less unstable without natural resources ... with an additional caveat that natural resources may have increased violence in particular regions of Congo. Possibly.

El Tiempo also tweeted a few other quotes from yours truly. First: “The decrease in Venezuelan democracy started before the oil
boom.” Second, a somewhat misquoted, “No resource boom has affected countries rich in resources.” (I am mildly unhappy with that one: my argument was only about democratic stability.) Third: “Colombia ought to avoid wasting the current mining boom.”

While my discussion was about democracy, that last quote is correct: lots of countries have blown resource booms, leaving them no better off than they entered. Colombia should avoid that. Of course, that is something easier said than done!

Finally, let me end by presenting the (weak) evidence for a resource curse in Zambia.The red line measures the country’s Polity score, a commonly-accepted measure of democracy. The blue line measures the government’s real direct income from the copper industry; the green line measures the percentage of government revenues from copper.

Zambia’s polity score dropped precipitously between 1968 and 1972, while copper revenues boomed. The country then democratized in 1991, after a period of prolonged low copper prices. The argument would be that copper revenues made it easier for Kaunda to establish a one-party state, while the period of low prices was essential to see the fall of that state.

The rub, of course, is that lots of countries in Africa followed the same trend around the same time. (See the below chart.) But you cannot rule out a curse for Zambia.

For those of you who have not, start reading Chris Blattman’s blog. It is the best blog on development economics (and a whole lot more).

Five minutes ago I started to procrastinate. As I do, I turned to his blog and found this post. Its title is exactly what I just told a Colombian reporter when asked what the government should do to ease local dislocations created by large-scale mining!

My answer? Give people cash.

What is nice about Chris’s work is that he has experimental evidence that giving poor people cash works to improve their earnings potential, and not just their current earnings. In an experiment, the Ugandan government gave randomly-selected young people a no-strings-attached grant of $400; roughly the average annual income. And what happened?

“Most start new skilled trades like metalworking or
tailoring. They increase their employment hours about 17%. Those new
hours are spent in high-return activities, and so earnings rise nearly
50%, especially women’s.”

So there you have it. Want to help mitigate the adverse effects of mining on poor people? Give them cash.

April 16, 2013

Reader Shah8 asks about the problems is Venezuela’s economy. It’s a good question.What are the time bombs waiting to go off?

Before I start, let me present the case for the defense. The linked paper argues that Venezuela’s economic expansion is sustainable. The linked paper, however, is incorrect.

First, the authors sustain that payments on Venezuela’s foreign debts are manageble. They are correct. (Figures 3 and 4.) The problem is that the interest burden is not the problem. The problem is that government of the Bolivarian Republic requires capital inflows around $15 billion every year to stay in balance. If those inflows drop, then BLAM ... sudden stop.

(The authors are convinced that China would not allow Venezuela to collapse. I am unclear as to why they believe that.)

Second, the authors argue that the bolívar is not overvalued. They base this on a scatterplot of countries. On the Y-axis they put the ratio between the official (or market) exchange rate and the exchange rate at which a basket of goods and service would cost the same as in the United States. Venezuela is not out of the pack.

The problem is that this measure has a lousy track record of predicting currency movement.

There is better measure of the bolívar’s overvaluation: the difference between the official rate and the black market rate. (The black market rate is tracked, more or less, at this website.) The gap has now approached three-to-one. It hard to see how Venezuela can sustain that without worsening shortages of imported goods or a major devaluation.

The only other country in the hemisphere in a similar situation is Argentina. When I was in Argentina in May and June of 2012, I was very tempted to blog about the controls despite a lack of time. (I wish I had; perhaps I still will.) Pesos were pegged at 4.5 per dollar, but while I was there the “blue market” rate hit 6.15. A Brazilian couple was arrested by dog-using police teams practically in front of me; they were carrying several thousand dollars. (The papers reported that they were acquitted.) That was legal, but the dollar-sniffing dogs were hunting black marketeers. The controls made (and make) life difficult for small manufacturers, which often find it difficult to buy the dollars they needed to import specialized goods.

But Venezuela’s exchange controls are in a whole different level from Argentina’s. The Argentine blue rate is around 60% above the official rate; the Venezuelan parallel rate is almost three times the official rate. Argentine controls hurt some importers who cannot get dollars, but they are not noticeable in the shops and streets. Venezuelan controls, on the other hand, cause cooking oil, margarine, and toothpaste to disappear. Venezuela has been plagued by periodic shortages for years, but they are now becoming pervasive.

That is not sustainable. Well, it is ... but at the cost of ever-worsening import shortages. Either Venezuela will develop an extensive set of import-substituting industries (a la Mexico circa 1980) or most Venezuelans will lose access to manufactured goods. There is no sign of the first thing happening.

Both these problems — a dependence on foreign borrowing and unsustainable capital controls — come together in the electricity crisis. I blogged about it in 2009: it is not getting better. Other countries have experienced temporary shortages (Ecuador in 2009) but none have suffered ever-more-erratic service for four years. (Ecuador has resolved its problems.) Installing thermal generators requires the government to borrow to get the dollars, and the refusal to charge market prices for energy drives up the budget deficit. Then, to make things worse, the exchange controls drive up construction costs. (I explain why that happens here.)

In other words, there are three ticking time bombs waiting to hit the next Venezuelan administration. First, capital inflows could slow; at some point they will slow. Venezuela is not in a position to handle that without a severe recession. Second, at some point either the shortages will become unsupportable or the bolívar will be devalued. Shortages will not be good for the party in power. A devaluation is equally problematic. With inflation already running north of 20%, it could (oh, heck, almost certainly will) cause large price spikes with all the ensuing damage to living standards. Third, the electricity crisis shows no sign of abating. Maduro blamed the blackouts on gringo sabotage; I do not think that is an effective political strategy.

There is a fourth time bomb: crime. Hugo Chávez was seemingly immune to criticism on the topic; the next administration will not be.

And there is a fifth: Chavista foreign policy. More on that in a future post.

I make no predictions about which will blow up first or how badly. But at least one of them almost certainly will. The next administration will have to fix the problems or deal with the aftermath ... but there are no painless fixes.

April 11, 2013

Part 2 is based on a stunning report from Bank of America: nominal dollar wages in Mexico are now lower than in China. (Hat tip: Beyond Brics. But note that we here at TPTM called it first!)

This is a great thing for China, obviously, and it has benefits for Mexico. It means that “nearshoring” will continue, as Mexico gains competitiveness against China. In fact, Mexico became competitive back in 2008, right after the big depreciation in the peso. The below chart shows Alix Partners’ decomposition of the landed costs (i.e., wholesale cost for U.S. sales) for five representative goods. In 2005, China was cheaper than Mexico; by 2008, that was no longer true.

But is it a good thing for Mexico? I am less certain. A boom based on nearshoring and continuing low wages ($2.50 an hour from BofA; $4.53 from the BLS) is a good thing for investors and the resulting employment boom is a good thing for Mexicans, but it does not presage much future growth. (In addition, the gains from the good news are already priced into the markets; ship-sailed if you’re looking for easy returns.)

Mexico is a solid middle-income democracy with a serious (but not existential) organized crime problem. It has made amazing strides in eliminating unnecessary volatility. The country works. But looking over the recent hype it’s attracting (see here and here and here.) I feel a little like Chris Rock. “You’re supposed to have a democracy! You’re supposed to have a middle class! You’re supposed to have factories! What do you want, a cookie?”

In other words, Mexico is performing just as you would expect a stable middle-income country with substantial long-term problems to perform. The expectations of super-returns and blather about Aztec Pumas (or whatever) is just hoping for a cookie.

P.S. Noah Smith expects rising demand for Mexican manufactures to raise wages. (You should all read his blog! It is a very good blog.) His error is simple: the demand for Mexican manufactures is extremely elastic, because Mexico is not the only country in the world.

P.P.S. No, I have not started to follow Twitter feeds. I hate that thing even more than Facebook.

April 09, 2013

Argentina, like the United States, measure the
poverty line against a basket of goods. The rate of absolute poverty is
measured against the monthly cost of a minimum amount of food; the
regular poverty rate is assessed against a broader basket which includes
a bare amount of housing, energy and manufactured goods. According to
the official agencies, in 2011 the monthly food basket cost ₱205 per
person while the broader basket cost ₱449.

As you might imagine, the mismeasurement of inflation has significant
effects on the poverty figures. (The data is at the above link.)
According to the Argentine statistical agency, absolute povery
(“indigence”) afflicted 1.7% of the population in 2011, while 6.5%
suffered regular poverty. The UCA conducted its own survery of urban
areas, using the official poverty lines, and found slightly different
numbers: a few more in poverty (7.8%), a few less in indigence (1.5%).

But when they used the actual cost of the basket, the numbers leaped:
21.9% in poverty and 3.3% in indigence, meaning that one in thirty urban
Argentines did not earn enough to avoid malnutrition. (The survery did
not include rural populations, so it is unlikely that the indigent had
access to much non-market food.)

Let me be clear: the poorest Argentines are much better off than they were under the old regime. In 1998, right before the country began its grinding depression, almost a third of urban Argentines were poor and almost a tenth lived in households that did not earn enough to pay for their caloric needs. Even with the revised numbers, the situation has improved markedly.

But two things stand out. First, Argentina did not avoid the Great Recession. Well-being degenerated markedly in 2008 and 2009.

Second, the Argentine government probably played games with the indigence statistics in 2008 and 2009 (but not thereafter): the official numbers and the survey numbers diverge rather dramatically in those years, even without the inflation adjustment.

In a way, the numbers make the games the government has played with the statistics even more incomprehensible. The Kirchners have a great record on poverty: this is not the Bolivarian Republic. The uptick in 2008-09 is entirely understandable, given the Great Recession ... and I very much doubt that the families thrown into poverty were unaware of it.

The thing is, “seem” is the operative word. Judging from actions, the Singaporean government does not care that its native-born population is going to fall. And it is probably right not to care! But I find it mildly vexing that it makes so much noise while doing so little.

$4,800 (U.S., at an exchange rate of 80¢ per Singaporean dollar) for the first and second child, rising to $6,400 for the third and beyond;

A deucedly vague “affordable” rental scheme for people with enough money to buy an condominium but are waiting to move in;

$480 a month for day care;

A tax rebate of $4,000 for the first child (doubling to $8,000 for the second and $16,000 for later ones ... but not refundable);

A cumulative tax deduction for working mothers of 15% of earned income for the first child, 20% for the second, and 25% for the third.

So what does this all come to? Well, the median income in Singapore is $28,800 per year. For a couple with two children, you get a one-time gift of $9,600. Then you get $5,760 for day care ... which drops in half when the child is no longer an infant. (And does not get you much unless day care is much cheaper than in the United States. Unlicensed housefront operations in Queens Licensed home operations in Upper Manhattan cost more than about $480 a month.) Our hypothetical two-income couple has an income tax liability of $2,232 (calculated using this chart from the Singaporean tax authorities) which unless I am greatly misunderstanding means that the value of the subsidy is effectively capped.

Total annual payments for a first child in a two-income family, with both earning the median: a one-time first-year gift of $12,792, followed by $5,112 per year until the child enters school. Life-changing, this is not. And worse yet, if you needed fertility treatments, which most older couples do, you needed to think about the cost. (Israel does it differently.)

This is not serious.

What would be serious? Ah. Well. In 2011, the Singaporean government ran a surplus of $21.3 billion. There were 42,600 births in the country. A fertility rate high enough to replace the population (in fact, a bare tad higher) would imply roughly 70,000 births. $21.3 billion ÷ 70,000 ≈ $300,000 per child.

OK, then: offer $300,000 per child. Tweak as desired. That would be serious policy. Of course, I am not saying that paying a $300,000 child bonus would be good policy.

But it would be affordable. And it would live up to Singapore’s reputation for social engineering! So before they give up and say it cannot be done, they really should at least try. Or stop complaining.

February 05, 2013

The great state of Alaska has a fairly unique way of handling hydrocarbon revenues. According to Article 9, Section 15 of the constitution of Alaska, “at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” In 1980, the legislature set the actual pay-in requirement at 50% of the above revenues.

The Alaska Permanent Fund Corporation (APFC) then invests the proceeds. For reference, in 2012 the Fund received $915 million from the state, up $28 million from 2011. (APFC annual reports can be found here.) The APFC is more-or-less free to do what it wants; it is fairly conservative but not as much as some other sovereign wealth funds.

Roughly 53% of the investment income earned by the APFC is then paid out in dividends (calculated here) to citizens of Alaska, i.e., any U.S. citizen resident for at least six months. (Alaskan law previously favored longstanding residents, but the U.S. Supreme Court threw that out in 1982.) Dividends are based on a five-year rolling average, so it is unlikely that a crash (like, say, 2008) would axe dividends although. That said, it is possible. Last year the APFC transferred over $605 million; in 2011 it transferred $801 million. (The link will take you to the web page of the organization that distributes the dividends, called the Permanent Fund Dividend Division; that is different from the APFC.) Historical data on dividends can be found here.

You got it: every man, woman, and child in the State of Alaska gets a check ($1,174 in 2011) cut to them by the state government from the proceeds derived from the state’s titular ownership of all subsoil resources. Which is why, obviously, Alaskans hate socialism.

Could this system work in Venezuela? Pedro Rodríguez, José Morales, and Francisco Monaldi suggest that the answer is yes. Oil has been a net benefit to Venezuela, but the country has clearly wasted most of the income; giving cash to citizens could solve that issue. Still, there are a couple of rubs. They address all of them in their paper, but not in sufficient detail:

How much is needed to keep the Venezuelan state running? Alaska set up the Permanent Fund fairly close to the beginning of the oil boom. Venezuela, on the other hand, will be doing so after a decade of high oil rents and almost a century of oil dependence. The authors are probably correct to argue that a new government could shut down most of the “misiones” without too much trouble. The authors are certainly correct to argue that the country would be better off getting rid of its idiotic fuel subsidies. It is less clear to me, however, that starving the rest of the bureaucracy would be wise, regardless of how bloated it may be. Venezuela right now suffers from too little governance in some very big fields (police, courts, schools and infrastructure, just for a start) and fixing the mess left over from President Chávez and his feckless Punto Fijo predecessors could easily require more money, not less;

How do you deal with disincentive effects? The amounts that would be distributed under the Venezuelan plan are a much larger share of income for the median (let alone poor) Venezuelan than for the median Alaskan. Alaska in 2011 had a median income of $67,825 per household, against an average APF check of ($1,174 × 2.65 people per household) $3,111. Call it 5% of per capita income. In Venezuela, though, similar numbers would have in 2008 represented “31% of per capita income for those at the bottom 25% of the income distribution, 15% for the next quartile and 8% and 3% for the top two quartiles respectively” at official exchange rates. Unofficial exchange rates could as much as triple those figures;

The volatility problem follows. Alaskans just have 5% of their income tied to swings in oil prices plus financial markets. (To be frank, the Alaskans have not solved that problem despite using the mechanisms proposed by the authors to do so.) In Venezuela, it will be much higher;

How do you get past the unpopularity of the plan? The Venezuelan opposition proposed such a thing in 2006. The authors have evidence that a lot depends on how the proposal is phrased, but those results do not take into account the inevitable opposition campaign;

If you solve problems (1) and (2) by allocating only a relatively small percentage of the oil money, what exactly is it that you have solved? I am honestly unclear. Is it the management of the hydrocarbon sector? Well, lots of countries have more-or-less solved at problem in various ways: Brazil and Algeria come to mind. Is it to weaken political machines? OK, but populists could still play with payouts, no? Is it to insure that benefits flow to the poorest? I am with them on that one, but it might be hard to sell.

In short, the authors make a compelling case, but I think the devil really is in the details. I would like to see a more detailed proposal.

December 20, 2012

I tend to avoid blogging about the stuff that I teach about in my class. That is probably a mistake.

A recent presentation by J. David Hughes about shale gas and tight oil has gotten some recent attention. It makes two conclusions. First, the price of shale gas is going to go up. Second, the tight oil boom is a chimera.

The conclusion that the price of shale gas is going to rise is true. It is also not news. (Why was it treated as such?) For example, I made a presentation on October 4th, 2012, to the Business and Environment Initiative at HBS on fracking and shale gas. In that presentation, I pointed out three things:

If you assume land costs of $5000 per acre and opex of $1.50 per MMBTU, then the “point forward costs” (i.e., marginal costs including land acquisition) of shale gas are $8.31 in the Fayetteville shale and $8.75 in Haynesville;

ARC Financial estimates that $22 billion per quarter
in capex is needed to
maintain production, up from current expenditures of $12bn;

Shale gas drilling has gone off a cliff (rigs in operation have crashed from a little over 1500 at the beginning of 2008 to only 500) ... and given the well-known hyperbolic decline rates of shale wells that meant production would soon decline unless prices recovered. (I reference those hyperbolic declines in this January 2012 post on Argentina.)

In short, Hughes is correct (his back-of-the-envelop calculation of the needed capex is actually only half that calculated by ARC) but his conclusion is not news and should not be treated as such. There are industry professionals who claim that well costs will fall and that land costs are not sustainable, so the marginal cost data should not be taken as data from on high. (Chesapeake has said that its magic spot for the Marcellus shale is around $5.) That said, few believe that natural gas prices will remain below $4 per MMBTU for much longer ... but “much longer” probably means more than a year. I do not expect U.S. prices to suddenly jump.

What about tight oil? Well, we already know that the marginal cost of tight oil is at least $60. When you add in the realization spread (the difference between the companies’ realized revenue per barrel and some benchmark price, usually Brent) you get a marginal cost of at least $90.

Hughes goes on to argue that the Bakken will peak in 2017 and then decline, but that rests on some dicey assumptions. First, that the 2010 EIA estimate of 9,767 potential wells remaining is correct. It is probably not: it assumes spacing of 2 wells per square mile, when four is already occuring and eight is already feasible. Second, it includes only discovered reserves. Finally, it assumes that oil prices will not rise further. The first two are relatively improbable.

Moreover, the Bakken is only one of many plays in the United States. It will start to decline relatively soon, if not by 2017 ... but other plays are expected to increase. The EIA really does know what it is doing when it makes its projections.

In short, it is true that the Citigroup analysis seems breathlessly out to lunch and it is true that tight oil plays require high prices. But we are not facing peak-tight-oil anytime within the United States. And while natural gas prices are fated to rise, the rise is not immediate.